4/20/2006 @ 6:00PM

The Business Of Baseball

Baseball owners continue to slam the ball out of the park. Team values increased an average of 15% for the second consecutive year, to $376 million, in our 2006 survey of Major League Baseball’s 30 franchises. Overall operating income increased to $360 million ($12.1 million per team) from $132 million ($4.4 million per team) the previous year, as revenue increased faster than player salaries.

The biggest winner was the Washington Nationals, whose value rose 42%. In March, Major League Baseball finally agreed to terms with the District of Columbia’s local politicians that will have taxpayers foot most of the bill for a new $700 million stadium, which should open by the start of the 2009 season and add $40 million to $50 million to the team’s revenue.

But the biggest story is the effect revenue sharing is having on the league’s economic landscape. Most of the money comes courtesy of the New York Yankees, which paid a record $77 million toward baseball’s revenue sharing system. The Boston Red Sox, baseball’s No. 2 revenue sharer, paid only $51 million. Such generosity by Yankees owner George Steinbrenner, required by the league’s rule that teams pay 34% of their net local revenue to help make poorer teams more competitive, is the reason why the Oakland Athletics, Minnesota Twins and Kansas City Royals increased in value by more than 20%.

Revenue sharing also had a profound impact on operating income. The Yankees and the Red Sox lost $50 million and $18.5 million, respectively, before interest, income taxes and depreciation. By not using their subsidies to boost player payroll (which was the intent of revenue sharing), the Pittsburgh Pirates, the Royals and the Tampa Bay Devil Rays each earned more than $20 million.

But the league’s reliance on Steinbrenner’s Yankees goes far beyond revenue sharing. For example, a visit by the Yankees can increase a home team’s ticket sales by as much as 25%. And the Yankees account for 27% of all league merchandise sales, the profits of which get shared equally throughout the league to the tune of more than $3 million per franchise. In effect, much of the league operates as subsidiaries of the Bronx Bombers.

But don’t feel bad for the Yankees or the Red Sox. They sit atop our rankings, worth $1 billion and $671 million, respectively, thanks to the revenue generated by their ownership stakes in regional sports networks. Steinbrenner’s $62 million in cable money from the YES channel was by far the most in the league. Moreover, the Yankees will have a new cash-rich ballpark by 2009–perhaps adding another 20% to the team’s valuation.

The big question after this season will be about baseball’s broadcasting deal with Fox, which is owned by News Corp. The current $2.5 billion, six-year deal expires after this season, and it is not certain yet whether Fox will renew its deal. The thinking here is that Fox will renew for a 5% annualized increase. The league’s $2.37 billion deal with ESPN, which is owned by Walt Disney Co., runs through the 2013 season. That means next year should be another boom for baseball, especially those teams subsidized by the Yankees.